Business Insight

Expanding to Southeast Asia : 3 Reasons why you fails in SEA market

Seok (Luu) Lyu
March 20, 2024

Having lived and invested in Southeast Asia, especially Vietnam, for a long time, I've seen many different types of startups, from small restaurants to IT startups. Especially before the pandemic, more and more people came to the region, calling it a land of opportunity.

Of course, many of them are doing well. However, not only Baemin Vietnam but also Toss, a Korean fintech innovation, had a setback in Vietnam. In 2022, Toss scaled back its business in Vietnam and officially closed its doors to the rest of Southeast Asia.

(Source : Baemin Vietnam)

You start from a high ground if you have a base in your home country when it comes to business expansion. If you really "start a business" in Southeast Asia from scratch, you're on your own in an environment that is, at worst, harsher in many ways.

The reason I'm writing about this today isn't to share pessimistic opinions or spread fear, like "don't go there" or "you're doomed if you go there". I think Asian startups should go global, and they should definitely keep the Southeast Asian market in mind.

In particular, I would like to see more Korean founders make use of their high product development capabilities to achieve success in Southeast Asia so that one day, founders who challenge and thrive in the Southeast Asian market afterward say, "I'm glad I read that article back then”.

There are many reasons why overseas founders or foreign founders fail in Southeast Asia, but I'm going to cover just three of them.

(Source : Unsplash)

1. Jumping in without knowing the market

When you start a business, you're going to get hit a few times, but you should be prepared to take a few hits.

- Not knowing the market at all

Many founders jump in with a lack of market research. It doesn't matter if you've read a lot of analyst reports on Vietnam, or if you have a relative/acquaintance who's been working in Vietnam for 10 years, or even if you have a Vietnamese family member. In the end, you just know slightly more than everyone else. 

The worst thing you can do is to hire a Vietnamese intern who speaks a little bit of Korean, ask them questions about Vietnamese people, market, and the culture, and then build your business based on that information. (Now that I've written it down, it sounds ridiculous.)

Especially if you're considering a B2C product, you have to be very careful when you are planning to expand your business. 

(Source : Unsplash)

Sure, it's true that Southeast Asia has a massive young population, and they love Korean culture. That's a huge opportunity. However, that doesn't mean you can easily get them as users. 

You don't understand every generation, every market in Korea. You're lucky if you get one right. Similarly, whether you have lived in Vietnam, are Vietnamese, or work in Vietnam, your knowledge remains at a personal level. If you're a foreigner entering the market for the first time, you will find yourself lacking the necessary knowledge.

- Knowing just a little about the market

Someone who knows only a little bit is scarier than someone who doesn't know at all. Particularly, since Korea is close to Vietnam and Indonesia, everyone has heard a lot of things and even visits often. As a result, people think they know the country. Because of this, there is negligence in research and analysis.

For example, Vietnam is known to have a huge young population and a very high mobile device usage rate. This is why many people assume that app services are very promising in Vietnam.

In contrast, mobile devices used in Vietnam are often not the high-end, high-capacity devices that we expect. If you launch an app in Vietnam, targeting the third, and fourth-tier cities, it is very difficult to even get it installed.

(Source : Unsplash)

- There are no shortcuts

It seems to me that most Korean founders make these basic mistakes in Southeast Asia for two reasons: first, they underestimate the market, and second, they are too excited, thinking that they've found a goldmine.

It's critical to keep in mind that zero to one in Southeast Asia is much harder than it seems.

There are so many cultural misunderstandings that make it difficult for foreign founders to understand these countries: differences in language structure, differences in racial and ethnic demographics, differences that come from the political systems and orientations of these countries, and so on. If you thought you had it easy, you might be mistaken.

- Work with a local partner

You have to keep exploring. Go out and see for yourself, ask experts in the field, and bring them along if you need to. Make a hypothesis, and don't forget to iterate on it.

If you don't have the local level of understanding and network, find a trusted partner who is a local .

Whether it's a co-founder or a founding team member, make sure you have a reliable and capable local member. If you think they're a key member, don't skimp on equity. In fact, that may be the lowest-cost approach to increasing your chances of success.

(Source : Unsplash)

2. Blindly guessing that the cost of doing business in Southeast Asia is low

For example, in Ho Chi Minh City, Vietnam, the lowest expected wage is incredibly small compared to Korea.

Many founders are blinded by the overwhelmingly low cost of employment. Even Vietnamese employees who speak Korean or English well get way less compared to Korean, or US citizens. Tempting, right?

There's a reason for (almost) every price, and in many cases I've seen, it goes something like this

1.You're impressed by the low salary and make a few hires

2. Things don't work out as well as you'd hoped, and communication doesn't work out.

3. The company starts hiring Koreans for positions that will interact closely with the founder, creating a structure with Koreans at the head level and Vietnamese at the deputy to associate level.

4.Koreans start hanging out with Koreans and Vietnamese with Vietnamese, preventing fast and efficient communication.

5.Not enough results compared to the cost and time spent

(Source : Unsplash)

3. Fooled by metrics related to Southeast Asian markets.

It's easy for founders to be tricked by traffic metrics for Southeast Asia, especially in markets like India and Indonesia. The first reason is, of course, the difference in population.

South Korea has 40 million people, Indonesia has 270 million, and Vietnam has around 100 million. A simple calculation of the value of a million downloads in each country based on population is 2.5% in South Korea, 1% in Vietnam, and 0.3% in Indonesia.

What about the cost/return ratio? 

According to Statista's average cost per click (CPC) for Google ads by country, South Korea is USD 0.98, Indonesia is USD 0.32, and Vietnam is USD 0.35. 

The GDP per capita for each country is 30,000 USD in South Korea, 4,300 USD in Indonesia, and 3,700 USD in Vietnam. 

Assuming that income and ability to spend are proportional, and that clicks lead to installs, Indonesia has a 44% cost efficiency of South Korea's, and Vietnam has a cost efficiency of 35% of South Korea's.

Of course, income and consumption are not completely correlated, and there will be differences depending on the sector. But it helps to get an impression of the market. 

If you add disposable income to the equation above, you can see that it is challenging to convert paid members (in Indonesia or Vietnam).

Spreading vouchers and offering benefits can quickly increase app traffic and even conversions. However, loyalty tends to be very low, so don't think of the same when interpreting metrics in each country. You need to understand the details of user characteristics based on which Southeast Asia you are in.

Endless reasons to fail, but we still have to go

There are countless excuses to fail and plenty of reasons not to.

(Source : CBinsights)

Starting a business is usually quite tough, and even experienced entrepreneurs don't succeed every time. Even if you set up a business in your home country, you don't always succeed. Sometimes it's destroyed by a natural disaster. 

Nevertheless, we keep trying new things. There is no doubt that Southeast Asia is a market for global entrepreneurs to explore, especially given the rate of growth in the region.

The question is, are we ready as founders? 

Southeast Asia cannot be classified as a single region; each country has as many differences as similarities. As a founder, you need to decide whether you want to target the entire region for your product.

If so, you should have a clear idea of which countries to start with. And if not, you will have to choose which specific countries to focus on.

I hope this article serves as a reminder for founders looking to tackle the various challenges of the Southeast Asian market.

Written by Seok (Luu) Lyu (Link)

※Original Source : 당신이 동남아시아에서 망하는 3가지 이유


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Seok (Luu) Lyu
Under The SEA Letter
Started as a founder, now a VC. A quick look at Southeast Asia's startups and random news from a venture capitalist's perspective.